Cost of Capital

The minimum return a business must generate to satisfy its investors and lenders, representing the weighted average of the cost of debt (interest) and the cost of equity (investor return expectations).

Any investment or project a business undertakes must generate returns above its cost of capital to create value. Projects that return less than the cost of capital destroy shareholder value even if they are technically profitable.

A founder's business has a 6% interest rate on its loan and equity investors expecting a 25% annual return. Her blended cost of capital is approximately 15%. Any new project must therefore earn more than 15% to be worth pursuing.